Supporting the global financial system through the coronavirus outbreak is the best course of action

Editorial: Central banks and governments are right to do what they can to ease the pressure, even if we can’t be sure of the full impact of the virus yet

The response of the equity markets to all this largesse was a raspberry – another slide in equity markets globally (AFP/Getty)

The market response to the latest injection of cash by central banks into the global financial system is not what the authorities must have hoped for. Last week the United States Federal Reserve announced an emergency interest rate cut and a programme to move $1.5 trillion into the markets to keep the banks solvent and able to help commerce during the coronavirus crisis.

Now they have acted again, with a further emergency cut in rates, to the range of zero to 0.25 per cent, and another $700bn being pumped into the system.

To give such sums their full dignity by notating them fully, that amounts to some $2,200,000,000,000 in US central bank money in all, with another substantial slug from the central banks of Europe, Japan, India, China, South Korea, Canada, Australia and the UK. The US moves were made in concert with other central banks across the world. Every official, including Fed chair Jay Powell, has decreed that they will do whatever it takes, or some similar formulation, to keep the world economy safe. Well they might, when China’s set to shrink this quarter, the first such decline in decades, threatening a global recession.

Yet the response of the equity markets to all this largesse was a raspberry – another slide in equity markets globally as soon as they had a chance to trade. You might almost call it rude, and it certainly feels ungrateful.

The law of diminishing returns seems to be at work here. Interest rates are almost at nil (and in some economies have gone “negative”), and there is little room to push them lower. The process of quantitative easing is, in its nature, infinite, because there is no necessary limit to how much money a central bank can create. However, there are evidently limits to how dramatic an effect a given injection of $1 trillion can make.

The US Fed is ceasing to have the ability to shock and awe markets. It has been pulling the same trick in successive crises since the reign of Alan Greenspan and the birth of the “Greenspan put” after the 1987 stock market crash. This particular party appears to be over. Indeed, it may not have the perverse effect of suggesting further problems.

Still, the world is probably better off than if the central bankers hadn’t bothered trying; and monetary policy is in any case not the sole weapon available to the authorities, or even the best. On the whole, interest rate cuts and monetary policy take anything up to two years to fully work through to the economy, as corporate loans are renegotiated and mortgages renewed. There is some immediate impact, for example with tracker rate loans, but otherwise the variable leads and lags familiar to economists apply, and more so now in such an era of uncertainty.

That leaves governments with the option of unleashing monetary policy, a bold example of which was set in Rishi Sunak’s recent Budget. The key in this case is to make sure that the money flowing into the economy is spent relatively quickly, with one such step being to target social security payments at those at the bottom of the income scale, rather than cut taxes for the wealthier elements of society (who are more inclined to save a windfall).

It is an excellent moment, for example, to heed the Child Poverty Action Group call for the government to increase payments for children if schools close because of the coronavirus, to protect children in low-income families facing extra financial pressure and the loss of free school meals.

There was already a strong moral case for removing some of the worst iniquities associated with universal credit, while the rate of statutory sick pay could usefully be driven higher in these circumstances, and extended to freelancers and the self-employed, if for a limited period. The abandonment of the BBC’s attempt to limit free TV licences for older people is another step in boosting purchasing power in a struggling economy. Supporting an economy through turbulence is usually cheaper than attempting to pull it out of a tail spin.

One of the few things that we can be reasonably sure about the coronavirus crisis is that it is time-limited, probably to around a year. The economic impact will mirror, with lag, the spread of the disease – there will be delays before companies are pushed into trouble or they are forced to make workers redundant. But sooner or later, via the acquisition of herd immunity and a vaccine, the worst of the coronavirus effect will pass, and the economy can return to a more normal position.

Then there will be a reckoning of the cost to society, and how best the world might use its financial and technological resources to make such outbreaks a less potent risk for the future.